As to the Business Roundtable statement, Purpose
of a Corporation, it’s a stab in the
back to the people who invested their money, entrusting the corporate managers
to fulfill their fiduciary responsibility to the shareholders, the owners. And
it’s wholly unnecessary. The headline: “Business Roundtable Redefines
the Purpose of a Corporation to Promote ‘An Economy That Serves All
Americans’.” The subtitle: “Updated Statement Moves Away from Shareholder
Primacy, Includes Commitment to All Stakeholders.” Here is the core of the
statement:
While each of our individual companies serves its own corporate purpose,
we share a fundamental commitment to all of our stakeholders. We commit to:
·
Delivering value to our customers. We will further the tradition of American companies leading the
way in meeting or exceeding customer expectations.
·
Investing in our employees.
This starts with compensating them fairly and providing important benefits. It
also includes supporting them through training and education that help develop
new skills for a rapidly changing world. We foster diversity and inclusion,
dignity and respect.
·
Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other
companies, large and small, that help us meet our missions.
·
Supporting the communities in which we work. We respect the people in our communities and protect the
environment by embracing sustainable practices across our businesses.
·
Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow
and innovate. We are committed to transparency and effective engagement with
shareholders.
None of these goals is objectionable. What is
objectionable—I would say immoral—is the order; more to the point, the
appearance of the first four on a list of purposes, which in effect
subordinates the shareholders to fifth class status. This is akin to a defense
attorney placing others’ interests above those of his own client.
Through experience, we have learned that a singular focus on
quarterly profits makes for unhealthy long-term businesses, which is bad for
shareholders.
Who ever said that maximizing shareholder value
necessarily correlates to a "singular focus on their next quarterly
bonus" anyway? That sounds like a straw man. If Parker's description of
the Business Roundtable's statement is accurate—that the statement actually
does prioritize "several other corporate commitments ahead of generating
long-term value for shareholders," it is definitely a call for
corporations to violate their fiduciary responsibilities. A primary focus on
“generating long-term value for shareholders” is precisely what a corporation’s
moral obligation is. Those “other commitments” are fine, and pursuing them
should not and need not come at the expense of stabbing shareholders in
the back. They shouldn’t be at the expense of shareholders. Nor should they be
the purpose of a business corporation.
A proper approach to the purpose of a business
corporation is described in the 1963 policy statement of Indian Head Mills
textile company under its then-president James E. Robison:
The objective of this company is to increase the intrinsic value
of the common stock. [This company is in business not] to grow bigger for the
sake of size, nor to become more diversified, nor to make the most or best of
everything, nor to provide jobs, have the most modern plants, the happiest
customers, lead in new product development, or to achieve status which has no
relationship to the economic use of capital.
Any or all of these may be, from time to time, a means to our
objective, but means and ends must never be confused. Indian Mills is in business solely to improve the inherent value
of the common shareholder’s equity in the company.* [my emphasis]
“[M]eans and ends must never be confused!” The
Business Roundtable lists
five key objectives that it claims to
“Redefine the Purpose of a Corporation to Promote ‘An Economy That Serves All
Americans’”; “Delivering value to our customers, Investing in our employees,
Dealing fairly and ethically with our suppliers, Supporting the communities in
which we work, Generating long-term value for shareholders.” In one of the
worst cases of businesspersons pandering to their enemies, the Roundtable lists
shareholders last. This is immoral. Let’s paraphrase Robison:
The objective of a business corporation is to increase the
intrinsic value of the common stock. Corporations are in business not to
deliver value to our customers, invest in our employees, deal fairly and
ethically with our suppliers, support the communities in which we work, or to
achieve status which has no relationship to the economic use of capital.
Any or all of these may be, from time to time, a means to our
objective, but means and ends must never be confused. Corporations are in
business solely to improve the inherent value of the common shareholder’s
equity in the company.
The Business Roundtable is reversing cause and
effect, and in the process selling out America’s consumers, productive workers,
and communities. The first four are not primaries. They are means The last is
the end. If we forget this hierarchy, we do indeed end up with “An Economy That
Serves All Americans,” a mushy phrase that really means a state-controlled
economy whereby productive people serve the state. A free market economy leaves
people free to work and trade in service to their own lives and flourishing: It
does not work for people who believe the economy owes them a living.
Again, “means and ends must never be confused!”
Nor must ends and effects. Good jobs, a strong and sustainable economy,
innovation, a healthy environment, and economic opportunity are all effects of
the primacy of the corporation’s purpose, which is “solely to improve the
inherent value of the common shareholder’s equity in the company.”
I found two more good examples of the proper
hierarchical approach to running a business corporation.
In 1894, however, NCR experienced a major setback: An order of
cash registers worth $50,000 was returned because the machines were defective.17 To investigate the cause of the poor workmanship, Patterson moved
his desk to the factory floor, where he could interact directly with his
workers.
Like many factories of the day, his was dark, dirty, and poorly
ventilated. Injuries were common. Water for drinking and washing was
unsanitary. Unhappy with the working conditions and pay, many skilled workers were
quitting. Patterson realized that he had not given his workers a reason to care
about the quality of their work.18
He quickly had the factory cleaned and ventilation systems
installed. He was among the first industrialists to introduce safety measures
for using dangerous equipment. And he built subsequent factories with massive
windows, allowing adequate lighting for his workers. These became known as the
first ever “daylight” factories.19
These changes improved working conditions enormously. Morale
increased, turnover decreased, and poor workmanship all but ceased.
In March of 1913, a disastrous flood struck
Dayton, Ohio, where many of NCR’s employees worked. Patterson quickly organized
a massive rescue and relief effort, rescuing thousands of people and giving
food and shelter to the suddenly homeless people. Townley concludes:
Patterson’s devotion to quality, his complete disregard for
convention, and his quest to improve all aspects of his business did more than
lead NCR to success. He molded an entire generation of entrepreneurial minds,
training many directly and setting the standards by which countless others
judged success. He demonstrated to business owners the benefits of investing in
one’s employees. And he showed the world what so many “greedy industrialists”
are made of: an enduring will to remake the world as it could and should be—and
on their own terms.
Clearly, Patterson demonstrated that the
well-being of his workers and their community were necessary contributions to
his company’s success, not a substitute for that success. John A. Allison grew
BB&T into one of the biggest financial firms in America. As I wrote in my
post "It's
a Wonderful Life" - in Real Life,
as the 2008-09 mortgage meltdown was occuring:
BB&T’s
philosophy (the company is now run
by Kelly
King) is laid out in a special section on its
website. The introduction stresses that although “Change is necessary for
progress, … the context, our vision, mission and values, are unchanging because
these principles are based on basic truths.”
Its core principles are led by its Values (reality, reason, independent
thinking, productivity, honesty, integrity, justice, pride, self-esteem, and teamwork, with a final word on the
role of emotions). Values are defined as
“practical habits that enable individuals to live, be successful, and achieve
happiness.”
Our ultimate purpose is to create superior long-term economic
rewards for our shareholders. This purpose is
defined by the free market and is as it should be. They take the risk if the
business is unsuccessful. They have the right to receive economic rewards for
the risk which they have undertaken.
However, our purpose, to create superior long-term economic
rewards for our shareholders, can only be accomplished by providing excellent
service to our clients, as our Clients are our source of revenues.
To have excellent client relations, we must have outstanding
Employees to serve our clients. To attract and retain outstanding employees, we
must reward them financially and create an environment where they can learn and
grow.
Our economic results are significantly impacted by the success of
our Communities. The community's "quality of life" impacts its
ability to attract industry for growth.
Therefore, we manage our business in a long-term context, as an
integrated whole, with the ultimate objective of rewarding the
Shareholders for their investment, while realizing that the cause of
this result is quality client service. Excellent service will be delivered by
motivated employees working as an integrated team. These results will be
impacted by our capacity to contribute to the growth and well-being of the
communities we serve. ** [my emphasis]
Clearly, a successful business can grow without
sacrificing its shareholders, or anyone else. Indeed, the well-being of
consumers, employees, and communities in general is aligned with the
shareholders. So for whom do the current leaders of the great American
companies sacrifice their shareholders?—apparently, in order to pander to the
most despicable "stakeholders" of all, the free enterprise-hating,
greedy, power-lusting “socialist justice” warriors. The Roundtable’s Purpose
of a Corporation is immoral, contrary to
the ethic of capitalism, and ultimately destructive of the "good" of
the "social fabric" of America, which is built around the
individual's inalienable right to pursue personal happiness.
A singular focus on maximizing the long-term
value for shareholders does not mean a narrow focus only on short-term profit
at the expense of other considerations, or stakeholders. It means shareholders
as the ultimate purpose of a business corporation. We live in an interconnected
world economy, where plenty of interests coincide. There can be plenty of contributing
factors to a purpose that can and should be taken into consideration. But
they should never be prioritized over the primary purpose of an organization.
There are plenty of other ways to prioritize those other interests. You
wouldn’t prioritize monetary profit as the purpose of a charity, although a
profitable enterprise may contribute to the charity’s giving purpose. And you
shouldn’t prioritize jobs as the purpose of a business, even though good jobs
contribute to the advancement of the business’s shareholder purpose.
Robison, Patterson, and Allison get it right. A
corporation is an association of private individual investors, and thus has a
right to exist for its own sake, like any other private assembly such as a
church, a charity, or a chess club. The Business Roundtable’s disgraceful pandering
to collectivism—”An Economy That Serves All Americans”—“redefines” the
corporation as a servant of society. But an economy does not “serve” anyone.
What we call “the economy” is the sum of the trade associations of productive
individuals. Those who frame the issue as “An Economy That Serves All
Americans” are speaking of masters and slaves, with the most productives
individuals (or their associations) as the slaves. The Business Roundtable
should go back to the drawing board, and redefine its redefinition of the
business corporation as a properly shareholder value-maximizer derived from its
shareholders’ self-interested right to earn a living, like every other
productive occupation.
To earn a living, whether through direct work or
investment of one’s savings, does imply serving others’ wants and needs.
But such service to others is the means to the only proper purpose of
one’s work, which is to maximize one’s own personal material (and spiritual)
flourishing. A reversal of those means and ends only advances the
collectivistic statist designs of the likes of anti-capitalists and socialists
like Elizabeth Warren and Bernie Sanders. Businessmen need to get some philosophical
backbone, because with “friends”
like the Business Roundtable, capitalism doesn’t need enemies.
** [NOTE: Allison retired a number of years ago.
I do not know if the new leadership adhered to the philosophy under which
Allison built the company. But it seems to have, at least in part.]
Related Reading:
In
Defense of the Corporation—Robert Hessen: This
book was first published in 1979 to defend “the right of the corporation to exist
and function freely.” Hessen’s goal was to counter Ralph Nader’s argument that
corporations are “creatures of the state.” The book is relevant today because
Nader’s call for federal chartering of corporations is the precursor to
Elizabeth Warren’s neo-fascist "Accountable
Capitalism Act."
